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Broadband and voice providers interested in pursuing a piece of the roughly $2 billion in remaining Connect America Fund (CAF) Phase II subsidies take note: the FCC has just released its road map for evaluating bids in the anticipated CAF Phase II reverse auction.

On May 26, the FCC released a Report & Order and Further Notice of Proposed Rulemaking (Order & FNPRM) that establishes a framework to allocate over $2 billion in CAF support for rural broadband over the next decade ($200 million annually) to competitive providers (and others). The agency intends to distribute this money through a reverse auction competitive bidding process in which competitive providers (including cable operators, CLECs, and fixed wireless ISPs) can bid for support to deploy broadband and voice services in high-cost unserved areas of the country.

The competitive bidding process will make available funding support in rural unserved areas where price cap incumbent LECs (the largest carriers such as Verizon, AT&T and CenturyLink) declined to accept CAF Phase II support. Through this reverse auction process, the Commission intends to incent providers to deploy cost-efficient broadband services across rural America.

As discussed in greater detail below, the item adopts a framework for ranking and evaluating bids based upon four service tiers, with the lowest tier requiring the delivery of service at speeds of 10/1, and the highest requiring delivery of service at 1 Gig/500 Mbps. Designing the auction in this manner will require the Commission to evaluate all bids simultaneously so that bidders proposing different service tiers may be competing directly for support in the same area. The Commission will then evaluate such bids through a ranking process that weighs certain criteria and takes into account the agency’s preference for bidders that can deliver services at higher speeds, with greater usage allowances, and at lower latency standards.

This reverse auction represents the first major opportunity for competitive providers to receive a share of CAF support. Given the scope of the framework, and the many details left unresolved (to be addressed in later Commission orders and notices), the auction is not likely to begin until 2017. However, the important overbuild challenge process is likely to occur before the end of this year, so facilities-based providers should continue to monitor this docket to ensure no support is directed to providers to overbuild existing networks.

Background

In 2011 the FCC created the Connect America Fund, which provided for up to $1.8 billion of the Connect America budget to be spent annually to make broadband-capable infrastructure available to as many unserved locations as possible within these areas served by price cap carriers. As an initial step in the reform process, the FCC implemented targeted CAF Phase I funding to advance deployment of broadband-capable infrastructure. More than $438 million in funding was authorized for price cap carriers to provide broadband service to over one million unserved Americans. Next, the FCC determined the areas eligible for the nearly $1.8 billion of CAF Phase II support. In 2015, price cap carriers chose to either accept or decline the offer of model-based CAF Phase II support tied to specific performance and deployment obligations over a 10-year term. Ten carriers accepted over $1.5 billion in annual support to provide broadband to nearly 7.3 million consumers in 45 states and one territory. Nearly $175 million in annual Phase II support was declined. For those areas where incumbent price cap carriers declined the offer of support, the FCC established the competitive bidding process that is described in greater detail below.

Overview

With the release of this latest Order the FCC begins the implementation of its proposed reverse auction process. In it, the FCC establishes public interest obligations for winning bidders. Additionally, carriers participating in the competitive bidding process must commit to provide service at one of four different performance tiers over the entirety of the 10-year term of support. The Order also establishes reporting requirements winning bidders must abide following the disbursement of CAF Phase II support. Lastly, the Order outlines the rules and framework for the Remote Areas Fund, which will award support subsequent to the completion of the CAF Phase II competitive bidding process.

In the FNPRM, the FCC asks questions about how to properly weigh bids that commit to different performance levels in the competitive bidding process. Effective comment in response to the FNPRM will be critically important for competitive providers seeking to provision service through alternative technologies (i.e. non-fiber based technologies).

Service Standards

Public Interest Obligations. Based on its previous determination that speed, latency, and usage are the three core characteristics that affect what consumers can do with their broadband service, the FCC adopts an auction process that focuses on these metrics. Although the FCC characterizes these metrics as “technology-neutral standards,” some technologies (such as fiber and hybrid-fiber DOCSIS platforms) will likely be favored over others.

Auction participants must submit their bids under one of four service tiers:

Baseline Performance Tier – At least 25/3 Mbps speeds and 150 GB of monthly usage, or a usage allowance that reflects the average usage of a majority of fixed broadband customers, using Measuring Broadband America data or a similar data source, whichever is higher, at a price that is reasonably comparable to similar offerings in urban areas

Additionally, for each of the tiers outlined above, the FCC will require bidders to designate one of two performance levels: (1) low latency or (2) high latency. By providing flexibility for bidders to designate their latency, the FCC hopes to encourage a wide range of competitive carriers to participate in the auction, particularly alternative technologies that by their nature have slower latency.

Low Latency – Low-latency bids must meet a standard that 95 percent or more of all peak period measurements of network round trip latency are at or below 100 milliseconds.

High Latency – High-latency bids must meet a two-part standard for the latency of both their voice and broadband service: (1) requirement that 95 percent or more of all peak period measurements of network round trip latency are at or below 750 milliseconds, and (2) with respect to voice performance, bids demonstrate a score of four or higher using the Mean Opinion Score (MOS).

To provide certainty for those competitive carriers bidding in the auction, winning bidders that comply with the performance requirements for each tier of service for the duration of the 10-year term will be deemed in compliance even if the FCC subsequently establishes different standards in a later proceeding.

Deployment Obligations

The FCC expects winning bidders to meet the same set of defined deployment obligations as those that apply to price cap carriers that accept a state-level commitment. Specifically, the FCC will require deployment to be completed within six years of funding authorization, and will require winning bidders to roll out service on a strict schedule (40 percent by year three, an additional 20 percent each following year, and 100 percent by year six).

Challenge Process

As with prior CAF initiatives, the FCC has included a limited challenge process that will permit unsubsidized competitors (such as cable operators, CLECs, and fixed wireless Internet service providers) to oppose subsidies in areas they already serve. However, competitors will not have the opportunity to update Form 477 broadband deployment data. The Bureau will release a preliminary list of eligible census blocks based on June 2015 Form 477 data, and will add census blocks to which price cap carriers accepting model-based support do not intend to deploy. The Bureau will then invite parties to comment within 21 days of publication if those areas have become served subsequent to the June 2015 Form 477 data collection.

Entities that are currently providing unsubsidized broadband and voice service within any census block identified as unserved will have the opportunity to file a challenge to such designation. In order to do so, the challenger must offer service within the census block of: (1) 10/1 Mbps or greater service, (2) with a minimum usage allowance of 150 GBs (3) at a rate meeting the FCC’s reasonable comparability benchmark, (4) and latency not exceeding 100 milliseconds.

Auction Process

The FCC will consider all bids simultaneously and will allow bidders committing to different performance levels to compete head-to-head. Obviously, bids offering to deliver service with higher speeds, higher usage allowances, and lower latency will be given a weighted advantage. Even though the FCC has stated outright that the auction is technology neutral, by designing the auction in this manner some technologies will have an inherent advantage over others. The FCC will score bids relative to the reserve price, set by the Connect America Cost Model. At present, the FCC expects that the minimum geographic area for bidding will be a census block group containing one or more eligible census blocks, although it has reserved the right to select census tracts, when the auction design is finalized, to limit the number of discrete biddable units.

In addition, just as in the Mobility Fund Phase I and Tribal Mobility Fund Phase I auctions, the FCC adopted a two-stage application filing process for participants in the Phase II competitive bidding process. Specifically, the FCC requires a pre-bid “short-form” application, where a potential bidder will need to establish its eligibility to participate, providing, among other things, basic ownership information and certifying to its qualifications to receive support. After the auction, the FCC will conduct a more extensive review of the winning bidders’ qualifications to receive support through “long-form” applications.

Accountability & Oversight

Just as it has many times before, the FCC outlined various reporting requirements that will enable the FCC to monitor recipients’ progress in meeting their deployment obligations. Specifically, the FCC requires recipients of support to submit annually the number and list of the geocoded locations to which they are offering broadband meeting the requisite requirements with CAF support in the prior 12-month period. The FCC will also require that the list specify the types of technology (e.g., fixed wireless, cable, fiber) that is being used to offer service to each location. If a carrier fails to comply with any of the FCC’s reporting requirements and/or deployment obligations, the FCC reserves the right to reduce, recover, and withhold support until the noncompliance is remedied.

Remote Areas Fund

The Order also addressed the long-awaited framework for the Remote Areas Fund (RAF). The FCC will award support for the RAF through a competitive bidding process, with providers receiving support to serve defined areas that remain unserved with broadband service, determined based on the most recent publicly available FCC Form 477 data.

Further Notice of Proposed Rulemaking (FNPRM)

In the FNPRM, the FCC asks questions on several specific procedures that will apply in the Phase II auction. Specifically the FCC asks: (1) how to apply weights to the different performance tiers; (2) how to achieve the public interest objective of ensuring appropriate support for all of the states; and (3) how to achieve the public interest objective of expanding broadband on Tribal lands. The Bureau also plans to release a Public Notice in the near future that will seek comment on other auction procedures that must be resolved in order to conduct the auction, such as the number of rounds during which bids may be submitted, package bidding, and what information will be disclosed to participants during the bidding process.

Timeline

The Order does not provide a timeline for implementation of the CAF Phase II Auction. Additionally, many of the many discrete issues related to the auction must be resolved prior to its implementation. The fact that the FCC included an FNPRM, and also plans to release a Bureau-level Public Notice to further develop the auction framework means that there is a slim chance that the auction will be conducted in 2016. That said, the challenge process likely will occur before the end of the year given that it is a necessarily preliminary step before the auction process can begin.

Providers of fixed wireline and wireless voice and broadband services should monitor this docket closely to ensure that the FCC does not identify portions of their territory as unserved, and thus subject to CAF subsidies.

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